Episode 1

Episode no. 1
Title: Tubular Exoskeleton-type Thing
Date: Jul 30, 2013
Description: Horace Dediu and Jim Zellmer discuss the politics, processes and possibilities of cars in light of: 1. Young people deferring drivers licences. 2. The growth of car sharing. 3. Practical alternative power trains. 4. Urbanization. 5. Increased Congestion. 6. Driverless cars. 7. Rise of the “App Economy”.


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Jim: So Horace, we’ve been talking about cars from time to time. I just bought a new car. So, tell me what’s happening in your [evaluations?] of the car business.

Horace: Well, uh, cars are a great subject that I think I mentioned this on The Critical Path because it’s one of these industries that everybody knows and everybody has an opinion on. It’s been around for a hundred years, so we have a lot of data. It’s a huge driver of economic activity, especially in developed countries. I read some statistics from an association of, sort of automobile manufacturers which claims that one in five jobs is due to the, you know, car industry. Or something to that effect. Some huge number about the value of the business. But, and politically it’s very

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Horace (cont): important because apparently large car companies aren’t allowed to fail. So, that means somebody’s got an in on a politician somewhere. But at the same time it’s diverse because you do have… well, it is and it isn’t. You have many countries that produce cars. And you have many companies that produce cars. And there is turnover in terms of who’s making money selling cars or building cars. But it is also weirdly consistent in many ways across the world. There was a time when there was a lot of difference between countries. There was a time when cars were differentiable, or differentiated, by the country they were built in.

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Horace (cont): That, I think, is going away. It’s sort of become far more… the delta has come down. So the worse performers have gotten better, and the best performers have gotten worse to some degree because they’ve tried to become bigger and had to compromise. And at the same time we have entrants in the form of emerging markets like, mainly I think Korea in the last few decades. We’ve had eastern Euoropean manufacturing going on although not of new brands. We’ve had brands in Europe consolidate through ownership, through purchase, through acquisition. And some interesting developments: Volkswagen, for example, is becoming

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Horace (cont): a spectactular success in ways that are not so visible.

Jim: Right. They’re almost the largest in the world and vertically integrated.

Horace: Exactly. It’s almost more about the fact that they’re successful with in innovation on the business model side rather than on the product side. So there’s a lot of moving parts – a lot of things you can look at. And of course there’s the thing… I’m obsessed about is, we’ve had this focus on the notion of product. Product has been the thing that we analyze as far as the industry’s success or failure. So we tend to think about whether cars are getting bigger, whether cars are getting more fuel efficient, whether cars are improving in one or another dimension, or

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Horace (cont): regressing on some dimension. And so we discuss the health of the industry in terms of the product. And that’s, I think, actually becoming less interesting once the product is very difficult to differentiate between companies. This is why I would say start thinking more about the innovation not on the product side, but rather on the business model. And innovation, as we mentioned, Volkswagon becoming more integrated. Toyota came in, and we don’t really talk about Toyota cars. Toyota innovation is, has been for decades, around their production system, right? So even in the 1950s it wasn’t really that General Motors was the object of admiration for its cars. It was an object of admiration for its branding,

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Horace (cont): its marketing.

Jim: Organization.

Horace: Yeah, organization structure, the way it was able to run the ship.  That became the thing that made GM, rather than product.  I read a great book that was, not on the car industry – it was actually on manufacturing during World War II. The thing was that… It’s a great book – Freedom’s Forge I think it’s called.  And I’ve mentioned it before. Amazing stories – how the auto industry was the blueprint for manufacturing almost everything during the war. And the people out of Detroit who became the executives that were hired to solve the production problems for the whole of the US, they came out of Detroit.  Or the school of thought – the school of production.  And it wasn’t just in the US.  The Soviet Union picked up almost all the

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Horace (cont): tricks, and in fact a lot of the tooling from the US. In the 1930s they were able to purchase a lot of the spare capacity that was going idle in the US in the form of machine tools.  And so a lot of Stalin’s factories were tooled by American manufactured tooling.  Same thing with Nazi Germany; they were enthralled with the Ford production system at the time, and borrowed huge amounts of US IP, in that sense, to making Germany run on a production system that was mass production. And later – actually after the war – Japan was actually built on those principles as well.  So to me the fascination with automobiles goes beyond the product. It goes into

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Horace (cont): this whole question of how are cars produced? How are cars marketed? How does a country industrialize, even, on the basis of this production method?  So much learning. I’m just now skimming yet another book, also on the aircraft production of World War II.  No scholar of the history of World War II can ignore the auto industry.  Even the writers of this book point out how the engines that went into airplanes – for example there were some manufacturers of, specifically of aero engines…  A lot of, even in the 1920s and 30s a lot of the knowledge about engines came from the auto industry.  And there were auto manufacturers who were shipping engines to the aircraft industry.  But the book points out how the economic value of the

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car industry during the 20s and 30s was orders of magnitude higher than the aircraft industry.  The aircraft industry was producing in terms of GDP or in terms of output less than 1% of the value of the car industry.  This was true even in the 20s and 30s; it was an amazing industry even back then.  So anyway, long story.  But that’s one of the things I’m curious about is how cars have… Where do they go from here, because we’ve gotten into a lot of interesting junctions in the road, if you will.  One is…

Jim: Oh, right.  I think you’re getting to a great point, which is – other industries you’ve looked at.  The value proposition is changing.  I looked at some data this weekend that at least 26% of Americans from 14-34 don’t have a drivers license now.  And in Japan it’s significantly higher than that. And we also have this growing…

Horace: And in Europe, too.

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Jim: We have this growing urbanization.  And then of course car sharing services and all those other things.  So you’re right that the value proposition is certainly beginning to change. And one wonders where that will lead us in the next five years.

Horace:  So what’s happening – usually disruptions come from places you don’t expect them, right? It usually happens when the product isn’t really… Obsession on the product side becomes… Suddenly you’re looking at something you didn’t realize was a product because the job is what’s being solved by the new thing and it isn’t necessarily something on four wheels.

Jim: V8 engine or diesel.

Horace: Yeah, exactly.  So people are right now… One thing I have issues with is the Tesla thing.  I think the Tesla product is – and I’m not the only one…

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Horace (cont): When Tesla launched they launched with the Roadster that was $100k or so.

Jim: Lotus – yes, exactly.

Horace: It was based on the Lotus chassis.  I think their prototype was even based on the Aerial Atom.  So, predating that even.  So it was an English chassis as well.  And then they went to Lotus.  And then, of course, the problem was it was very expensive.  When Elon Musk was asked about this he said all technologies begin with early adopters who are usually wealthier and are willing to pay for the innovation at the beginning.  So his point of view is very much the opposite of a disruptor’s point of view.  The idea of behind… Even the people that talk about Tesla disrupting – it isn’t disrupting in the classic sense.  Now, let me put some caveats.  One – it may be that it’s disruptive in terms of distribution.  It may be that

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Horace (cont): the idea of getting rid of dealers is a disruptive idea which allows them to evolve the product.  Maybe the service aspect will be disruptive.  Because then if you hire the car as transportation you don’t have to deal with sales, service, support and all these other issues, because they take that away and make the car a service.  Then there might be opportunity there to redefine the value proposition.  But fundamentally, the idea of changing the way everybody drives and the way transportation is handled isn’t going to come from a power train change.  There are, in fact, issues with this particular power train running headlong into obstacles.  Not only do we have problems with filling stations, problems with range anxiety, problems with weather and applicability in all

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Horace (cont): types of driving everywhere.  They built these cars to solve too many problems.  I think the more interesting approach – and this is what I would have called a disruptive approach… And by the way, so let’s…  You know, I would love to make this as a checklist.  So number one: capital deployed.  Tesla.  Column one is Tesla.  Column two is the alternative.  Column one:  Tesla capital deployed.  Line one: billions of dollars.  Column two: millions of dollars.

Jim: Wall Street these days, certainly.

Horace: Target market. Rich people: Tesla.  Poor people: column B.  Third point.  Size – size of vehicle.  Huge or, I would say even before,

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Horace (cont): it was small but essentially it was a toy.  It was not meant to be utility driven.

Jim: Yeah – it was a marketing exercise.  Sure.

Horace:  It’s utility and prestige.  We could even call that as the next object on the, you know – the next thing.  Job to be done.  The job to be done for Tesla from day one has been to make rich people feel good about the fact that they destroyed the world.

Jim: (laughing)

Horace: And you go down the list.  And so its… foothold market in the US.  And you go down the list and what is the exact opposite of what Tesla did, and put that in column B.  And by going down that list you will actually create the disruptive idea.

Jim: So, let me pop the balloon.  So why didn’t the Tata’s Nano, or the Renault Lagoon??? – why haven’t those things taken off?  I mean, is it lack of infrastructure?

Horace:  I actually thing they haven’t been thought through in a system-wide

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Horace (cont): fashion.  And here’s what I mean.  This is probably… I know Clay is actually… He has relation with the Tata group.  At one point he was on the board of Tata consulting.  I don’t know – I assume he has given some input on the Nano.  The problem is that, again, it’s product-oriented.  It’s not the entire process.  Or, I would even say beyond the process.  To rethink automobiles you have to rethink all these things on my long list.  Where does it take a foothold?  Now, one thing is it is in India.  But the company building them is an incumbent in India that has already one of the largest market shares of automobile manufacturing in India.  So if you look at percent of all the cars produced in India I think the Tata group makes, I think – if it’s not number one it’s certainly in the top three.  The next problem is that they repurposed not just

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Horace (cont): their business model – they repurposed their plants, their designers, their engineers, their production people.  They built a new plant for the Nano, but it was on the blueprint of all the other plants in the whole world.  You have to rethink at the very very bottom what manufacturing actually is.  There’s one example I’ve seen of rethinking of the manufacturing process, and that is BMW’s iDrive, or not iDrive, i…

Jim: Yeah, the iCity or iSomething.

Horace: iWorks or iProcess.  I don’t know what they’re calling it.  But there’s…

Jim: Of course, their price points are not exactly “emerging markets” either.

Horace:  Well, right.  But that’s because you have to go down this checklist.  They’re launching by building factories in Germany to make cars for Germans.  Now, if you’re going to do this right, again, my idea is yes, the India thing is the right thing to do.  But the

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Horace (cont): wrong thing was doing it using a large integrated plant.  The better thing to do is to build a cottage industry where people build parts for cars and then assemble them in almost a do-it-yourself fashion.  Not even the BMW vision changes dramatically the whole idea.  Here’s my dream of a new car metaphor.  Because, again, we’ve seen this in computing.  Computing went personal.  And computing went from something that only IBM in the most complicated and expensive way could make computers, down to a hobbyist who could do it themselves.  And that happened actually very early on.  In the 70s and 80s hobbyists could make computers because of microprocessors.  So the thing modularized once the microprocessor became available.  And so we haven’t seen anything like that in the auto industry.

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Horace (cont): Of course, you have people putting cars together on their own.  But they’re not… First, they’re discouraged from selling those cars because the regulations say you cannot be a car manufacturer without getting the car certified and all these other things.  But also, the safety requirements and all these other things preclude someone from being a do-it-yourself car maker.  And so this is where an emerging economy is exciting.  Because the components have been modularized to the point where you can buy them off the shelf.  The body panels… Here’s the other thing.  When you look at the way a hobbyist would built a car, as a kit car, they would start with the frame.  Usually body on frame or it’s a tubular exoskeleton type-thing.  I don’t know exact terms for it.  But the way cars are made mass production they’re done as a unibody, stamped sheet metal, welded by robots, painted,

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Horace (cont): and so on and so on.  So the process of building cars is done the same way everywhere in the world when you’re dealing with mass production.  And then the hobbyist model, which is putting it together from a kit.  You might weld a few things together, but it’s not going to be done… You do it one-off.  What I’m struggling with – and I think the exciting thing is that what if you could create a hybrid betwee these two where you could manufacture do-it-yourself cars on a large scale where the components don’t need a steel stamping press, which is… Stamping machines are sometimes the size of buildings.  They are probably the most expensive part of the factory.  They are… One data point, just to give you an idea.  I was reading an article about a new plant that was being build in Japan for Toyota – a new Toyota plant.  There haven’t been very many in Japan,

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Horace (cont): by the way, for quite a long time.

Jim: No, they’re leaving, mostly.

Horace: Yeah.  There was a big deal that Toyota built the plant in Japan.  And they did it as cheaply as possible.  They said they were trying also to move it to the US and build a US plant along the same lines.  And an exec at Toyota said that 60 or 40 – is it 60 or 40 – gosh, I don’t remember exactly – but a significant amount of the cost of the car is paying back for the manufacturing plant.

Jim: Sure.  Massive capital.

Horace: So, a multi-billion dollar plant requires you to mortgage your production to it for a long, long time. So, for example, a car that cost 15.. 20.. let’s see.  I don’t know.  Cars don’t cost $15k anymore, do they?

Jim: (laughing) 25.

Horace: $25k, you know.  Maybe, you know, $10k of that is actually paying back the mortgage on the plant.

Jim: Yeah, it’s like an Intel fab, right?  Billions for the fab.

Horace: Exactly, exactly.  So you get into these cost structures.

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Horace (cont): You have to ask “could there be a better way”?  Can you squeeze those down so it doesn’t cost billions, it costs millions?  Tesla said… Probably they didn’t even ask the question.  They didn’t ask.  They said we want to make cars, so let’s call every… Does anybody know someone who knows how to make cars?  So you pick up the phone, you find – because you’ve got money, you’ve got all resources in the world.

Jim: Right. Well capitalized, of course. Yes.

Horace: You go and get the best guys.  And the best guys are going to tell you yes, you need $2bn to make a plant.  They bought the one in Fremont.  And lo and behold they’re a car manufacturer.  And all the pomp and ceremony that goes with that.  Instead of sort of saying you know, we don’t have any money; we don’t have any smart people that know how to make that.  Let’s figure out how to do it without that.  And, by the way, the Chinese and the Koreans and everybody who… even the Indians who got into this business – they all did the same thing.  Because the government said yes, I think we should have a car industry.  And so they brought on board the smartest and brightest people and said OK, you!

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Horace (cont): You have a franchise.  Go forth and make a car industry for us.  And then they pick up the phone – find out the best manufacturing experts and let’s start building cart plants.  And they use the same blueprints as they did everywhere else.  Canada – it doesn’t matter.  Iran.  Every country in the world.

Jim: Well, it’s about jobs.  It’s not about the cars at that point.  For the governments, they want the jobs and the tax base.

Horace: Exactly, exactly.  So no one stopped to say wait a minute!  Is there another way to build cars? No! There’s one way to build cars! And that’s what… All of us use it.  And you can prove it because it’s so commonly done and there’s no dissenting voices to the subject.  And that, to me, is the frustration, is that it is very definitely possible.  We have existence proofs all over the place.  Especially in the technology industry.  You can make stuff differently.  And why should cars be exempt from this rule?  Now one thing that may happen that could be very exciting is this… You know, if we have manufacturing technologies like

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Horace (cont): the do-it-yourself… not… These desktop…

Jim: 3D printing and all that.

Horace: Right, they call it 3D printing.  3D printing of certain parts might change dramatically.  You know, we need to get into larger stuff that needs to be made.  But if you can use steel tubing for your frame.  If you can use composite materials for your body panels.  If you use off-the-shelf gas or electric or diesel – doesn’t matter.  Power train is not… power train is like picking a CPU

Jim: That can be purchased, no doubt.

Horace: Exactly.  There are plenty of companies that make them as modules.  The only question is how do you deal with the final assembly.  How do you do the painting?  How do you deal with issues of regulatory approvals.  And so on, and so on.  And by the way, I also mentioned this Gordon Murray guy who has put forth some ideas.

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Horace (cont): There’s not much to read.  So I don’t know how far he is on this trajectory.  But he also has the right idea that says really you have to… He calls it iStream. The whole idea is to think through the very beginning.  And it makes sense, because he came out of car racing. And in car racing they have, essentially, a custom building process where, although you can make a run of cars, each one is hand-built.  And it’s built from a design that is very light, that is very modular.  And it is optimized not for throughput of production, but for performance.  And if you borrow the best ideas from racing and then apply a little bit of mass-production magic to it, I think that process could be a very exciting idea.  The problem is, he’s going to run into a problem selling this idea to existing manufacturers

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Horace (cont): who have committed to workflows, who have committed to cost structures, and who have committed to markets that steer them away from it.  And that’s the whole problem.  To break this knot – this impossible barrier – it’s… You need to kind of take the idea outside of the context, which I think is into developing markets to try to create indigenous production.  To do something along those lines.  And it’ll take a long time. And it won’t seem like there’s much progress.  Anyway, to me that [?] stuff.

Jim: So why have these niche assemblers not, you think, expanded?  I mean, you have one in Finland.  Is it Valmet or…

Horace: Well, it’s a contract manufacturer.  That’s another thing.  Very, very rare to have contract manufacturering in cars.  Why?  Contract manufacturing, meaning that… OK – pick up the phone: you have a design.

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Horace (cont): Maybe you made the design yourself.  Or you hired someone to make a design as happens in computers.  In computers, HP doesn’t do anything. HP picks up the phone and says I need a computer for next year or the year after that.  And someone in Taiwan presents them with the design.  And then they say OK, I’ll take that design.  Now please arrange manufacturing.  And somebody goes, picks up the phone again and calls the contract manufacturers. So you have contract designers, contract manufacturers, and then somebody else probably does contract support and sales.  So the company at the center, i.e. HP or Acer or any of the brands we see on the computer, don’t ever touch the product.

Jim: Right.

Horace: They are not involved. I think it was one of them was famous about actually being proud of the fact that they don’t touch the product any way along its… At any stage of its value, of its existence.  All they do is they are essentially a project manager.  So they manage the project

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Horace (cont): and the brand.  And the same is now happening in TVs.  Visio, I think it’s called, or something like that.  One of the biggest brands in TV today has nothing to do with TVs. They don’t make them.  They don’t design them.  They don’t ship them. They don’t service that.  They don’t sell them.  They are a couple hundred people in an office in San Diego.  That is the brand.  So that’s happened…

Jim: Right, so the Boxter and the Cayman, for example, are assembled, some of them in Finland.

Horace: Yes, so what happens is if you have a few of these plants.  So, they’re like the FoxConn.

Jim: Right.

Horace: They’re tiny. The number of units that get produced this way globally for the car industry must be like in the tens of thousands.

Jim: Right, it’s very small.

Horace: It may be more common for trucks and buses.  But I don’t know that industry well. If you focus on passenger vehicles – cars in particular – it’s unheard of.  You’ve got these tiny, sometimes, you know…  If you have

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Horace (cont): a product… In the case of the Cayman or the Porsche Boxster, these were not fitting into Porsche’s existing plants.  Existing plants were set up for the 911 or the Cayenne or something like that.  And those were running at full speed.  So for them to slot in a limited production or limited run of a product extension… It made sense for them to actually outsource them.  But this outsourced company or contract manufacturer is really batch oriented.  They’re not continuous flow type of business.  So they’re not going to generate large volumes.  In many ways, actually, so is FoxConn.  You know, that’s how they operate. More in the batch model.

Jim: Right, right.  Massive demand, and then it goes away.  Massive demand.  You would think that these guys who make the niche cars would have

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Jim (cont): some experience in the contract and the supplier relationships to think differently about this.

Horace: Yeah.

Jim: I’m just surprised it hasn’t happened.

Horace: You’re right. So that’s possibly where the root could – where the disruptive root could… Where disruption could take root.  And how it would happen – yes, some contract manufacturer could says yes, I’ve been doing this for other people. I’m at their mercy.  In fact this plant in Finland – they had Porche for a while, right?  They had even Saab.  Years ago they did a couple of Saabs. And they they got a deal with Fisker.

Jim: Too bad.

Horace:  And then that whole thing imploded.  And they have to lay off their workforce.  Basically their pipeline ran dry.  And so they couldn’t keep the plan open, even.  And they should be scratching their heads and saying why don’t we create our own company.  I mean our own brand.  And then the probably someone smart will tell them you know how much you have to get through?  You’ll have to get to regulatory

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Horace (cont): issues.  You have to find a way to market this.  You don’t have the competencies in any of these things.  And they would just say yep – looks like mission impossible.  But if you were naïve enough and you were in an emerging country and you were doing his contract work and then you realize there might be a local demand for something that you built yourself. Maybe it’s a tractor. Maybe it’s not even a car.  Maybe it’s a motorcycle or it’s a moped or something like that.  A lot of that is going on in China now.  But these guys who used to do it for somebody else decide that hey, you know we can actually build the brand.  We can actually build engineering.  We can actually find people to buy it.  This happens so many times in so many industries it’s a little bit boring to even go back into it.  But that’s what’s not happening in the car industry.  And, you know, you’re pointing out exactly why it’s one of these things where we have to go and do more analysis.  My instinct says

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Horace (cont): that there hasn’t been indigenous production because people are fearful. They think it’s too expensive.  They think they need an integrated approach.  They don’t…  Even if you ask someone in an emerging country why don’t you build a car company?  They will say, yeah, but even the people in this country, they respect BMW.  They respect Western brands.  So if I introduce a local brand, they’re not going to buy for me even though it’s made here and it’s cheaper and so on.  Because they’ve been brainwashed to think that only foreight cars are good.

Jim: (laughter)

Horace: You know what I mean?

Jim: Of course.

Horace: So there’s that.  There’s overcoming it.  But there’s also counter-examples to that.  Take the VW Beetle.  The VW Beetle was the anti-GM in a sense because it was one…  When you look at their advertising they celebrated the fact he celebrated the fact that they’re quirky.  They celebrated the fact that the’re weird and they were an outsider and didn’t conform to any of the notions at the time of being competitive.

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Horace (cont): And they were great as a counterculture symbol and as a disruptive idea in the in the 1960s that a small car made sense in a big car country.  And so to every list of impossible goals and impossible things to overcome, you have these examples in history where it did happen.  And so you have to have faith that… At the end of the day all the great bets are based on faith.  The data will tell you always not to do this.  So, anyway.  I don’t know.

Jim: You know, one of the things we talked about a few months ago was the auto manufacturers missing the shift – the position for the iPhone or apps, and thinking that the car was the center point of the apps versus the smartphone or tablet, let’s say.  Is it possible that the value will change?  The

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Jim (cont): perception people have will change?  And car-sharing…

Horace: Yeah, that’s where…

Jim: Or the apps… Somebody will – almost like iTunes on Windows. Somebody will create a value model on top of the current industry and therefore make the entry more generic. And maybe that’s more likely what will occur.

Horace: That is indeed probably the most exciting way.  Because an outsider will come in,  look at the problem as an information problem, not a transportation problem.  They’ll look at it and say… This would be my dream.  Someone would say, you know, I see the job to be done here.  The job is people don’t want cars.  Ownership of cars is not just expensive, but it’s actually adding a lot of waiting into your life.  Waiting in traffic.

Jim: Yes.

Horace: Waiting to park.  Waiting in line at the DMV.  Whatever.  You’ve got all these hassles associated with your car, so we’re gonna solve your problem of transportation by providing  you with

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Horace (cont): less waiting.  And then they say, well that’s an information problem, because knowing where the cars are and so on, and allocating the cars.  So the car at that moment is off the shelf.  And you say, OK, we’ll just pick whatever cars are available.  Oh, if it’s electric that’s even better because our economics are going to be even better with electric cars.

Jim: Right.

Horace: They won’t break as much and so on.  So the innovator in this case looks at it as an information problem, attacks a job to be done that’s unmet, uses off-the-shelf technology which is just a city car with an electric drive.

Jim: Sure.

Horace: And then says you know what?  These cars – I go back to the manufacturer and I tell them – you know what would make them better is if we had this or that or the other thing.  And then the manufacturer would say thanks, we’ll get back to you in five years.  And you don’t have that time.  And you say no, I want to have it done, next six months.  And then you start to think maybe I can make the car myself.  That is really the spark of a potential story there.  Because if the person… And that’s the cool thing, is the same thing

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Horace (cont): that happened with smartphones where Apple said, in order for us to get a better phone we need to solve these problems.  And that may involve getting into new businesses.

Jim: Right, apps.

Horace: You get into apps.  You get into services.  You get into Siri.  You get into… Suddenly you’re solving a whole set of different problems.

Jim: Owning and leasing capital equipment.

Horace: Yeah.  But the fuel was the huge profit you got because you solved the job.

Jim: Yeah.

Horace: The fuel to get you into the new industries is supplied in ample quantities, beyond what you can absorb.  So suddenly this guy who’s making a business selling information really, to consumers about where to get a car at a time when they need it.  And not to get a car when they don’t need it.  That simple shift makes them, hopefully, wealthy beyond their wildest dreams.  And they say, you know what?  I have so much capital now actually, I can buy a car company.  And they’re actually quite cheap to buy because as you know they don’t make much money.

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Horace (cont): And so they’re usually wasting assets.

Jim: Right.

Horace:  And you go in… They could go and grab Saab, for example.  Boom.  Just pick up Saab for peanuts, right?  Or pick up a brand out of the UK or something.

Jim: Fisker.

Horace:  As the Indians did.  They bought Jaguar.  They bought Land Rover.  BMW bought Mini, which was essentially a defunct brand in the UK as well.  So you can get that.  And you get the brand, and you can get some tooling, some facilities, some distribution network, whatever.  Throw most of it away and rebuild the business along the lines that Saab served this need.  And so they would then create a niche for themselves. Sort of, electric vehicles optimized along the job to be done of not being owned.  And then they have great connectivity; that they have built in mesh networking; that they’re actually built around the information problem.  So they have perfect metering.  They have better metering

36

Horace (cont): than taxis do.  They’re getting now the resolution…

Jim: Well that’s already happening.  OnStar and others are selling their data to insurance companies.  There’s deals back and forth over risk management.

Horace: Exactly.

Jim: So for this revolution to happen – for this disruption to happen, do self-driving cars have to become available first, given the regulatory issues.  Or is there enough…

Horace: Self-driving is one of these things that is a little bit “cramming”, as they say.  It’s a technology that is being crammed into it at too early a stage on the evolution of what can be absorbed.  The problem, obviously, is because not only does it have social impact – not only does it have all kinds of liability issues, all kinds of incredible problems in terms of fitting into the existing value networks,

37

Horace (cont): but fundamentally I think it may be simply too early.  The technology itself is not… The problem is… The best example might be where… Here you have great computing power and great technology and you’re saying let’s apply it to the problems of cars by making cars drive themselves.  Now I’m going to take you back.  And this is one of the great stories from Christensen, which is the story of the transistor.  And the story of the transistor is that when it was developed it was… The idea of solid state amplifying and solid state gates that were driving… The main application of that, the problem that transistors solved, was amplification.  And that was really radio and later TV.  And so when the transistor was invented

38

Horace (cont): the guys who were making radios and TVs looked at it and said we can’t really make use of it because the quality of amplification is far worse than the tubes that we’re using.  And so… But they said we’re not ignoring it.  So they took it under R&D development.  And they began to develop better quality transistors.  And they spent billions on semi-conductor research and solid state.  But not bringing anything to market.  In the meantime the transistor was taking by hearing aid companies, by the Japanese with transistor radios which are very poor quality radios which didn’t have a lot of amplification because you had a single earpiece to listen to.  There wasn’t a need for filling a room with sound, which is what the radio market at the time was all about – the console radios and console TVs which sat in the living room.  So what happened was that the disruptive approach came via

39

Horace (cont): a completely different track, not through the existing industry.  So my point is that… Replace transistor with computing technology, right?  With cloud and all the stuff that Google works on.  All right, so Google is taking that transistor and trying to apply it to the car today. And they’re going to be in development for decades trying to make it work.  In the meantime, somebody takes the information technology and says we’re going to make the equivalent of a hearing aid or a transistor radio.  Not to make cars drive themselves, but rather we’re going to solve – hey, how about cars just being available when I need them, right?  I’ll drive them, but please tell me when and where I can go get a car.  And I’m willing to pay for not owning it.  Right?  So that’s the solving of the problem.  And those people who took that trajectory outside the existing value network and the definition of what a car is.

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Horace (cont): And then they might actually sell the self-driving problem.  Because they’ll take it in incremental steps. So one of the things, obviously, a smart car would have is self-awareness in terms of where it is, and so on.  Maybe it sends you messages.  Maybe it begins to communicate with you in ways… Help you get the job done.  And maybe in some cases it’ll simply be inside of a parking facility and it’ll just drive itself from its parking spot to sort of become a valet car.  Imagine – instead of having self-driving cars, how about a self-valet car.  There’s an interesting problem, right?  So you drop the car off at the front of the building and it drives itself into a parking spot.  It’s not solving… It’s not building a railroad across the continent.  It is simply getting a small job done.  And it’s likely to learn from that to become better and better at doing it.  And by the time it evolves into being a self-driving vehicle

41

Horace (cont): they will have solved all the right problems and will have ignored all the impossible ones.  And that’s where I’m thinking… That’s where it should go.

Jim: There’s an analogy to this, somewhat.  Ten years ago there were several startups trying to create the tiny point-to-point air routes.  One of my friends was involved in one.  You know, where they had this whole idea of these small jets – these small planes that would take you from…

Horace: Yep – air taxis.

Jim: Yep.  The whole thing.  Right.  There was a guy, I think from Citrix.  I can’t remember.  He put a lot of money into it.  And of course he saw it as a big math problem, which it is in some ways.  But just the economics just never worked.  And that’s what I wonder about this…

Horace:  I bet they got hit by the downdraft in the market in the whole economy.  Because a lot of the customers would be somewhat more wealthy.  I remember because Clay was talking about this also a few years ago – the air taxi business – and suggesting that that might be the

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Horace (cont): disruption to the airline industry.  Because it was about making planes… Taking the whole job to be done to a new level.  The problem still is that it relies on too many dependencies, one of which was actually there have to be new types of airplanes.  That there have to be wealthy enough customers.  That it does have to work in the United States first and not so easy to move to Europe.  And it’s got a lot of constraints on it.  And there’s one or two little things that may have killed it.  It was too fragile as an idea, although it had a lot of promise.  And I’m not saying that this idea of an information-based car is gonna work out.  I’m just suggesting that a lot of the experiments that I’m seeing today have less of a chance than even these rather fragile ideas that we’re putting

43

Horace (cont): forward here.  Because they at least – these new fragile ideas are at least – have a disruptive potential.  Going against an entrenched system with a cramming and brute-forcing a solution into that.  It’s the Segway.  It’s Google Glass.  It’s all these things which are ambitious, but rubbish at the same time.

Jim: (laughter)

Horace: To reuse a phrase from Jeremy Clarkson.  And they’re rubbish because they don’t work nearly as well as the average person or even beyond a certain very tiny niche they’re not gonna be useful.  So anyway, that’s my rant.  Cars – we could take them in so many directions.  The job to be done… One of the things… There are opportunities.  We did a bit of an email exchange

44

Horace (cont): on this, on what would you look for in a new car.  And my answer to you was that I liked the idea of making cars more appeal to women.  Particularly if cars are…

Jim: (laughter) Which was a factor in my purchase, by the way.  Absolutely.

Horace:  And the phrase I picked up was “happy wife, happy life”.  And one of these things that shocks me to this end because somehow women aren’t part of the discussion.  They are more and more, but the carmakers haven’t really nailed that question of…

Jim: Oh, definitely not.  (laughter)

Horace: What is it that…  I know there are many women work in car design. I actually met one once.  But I think maybe even… Maybe what they’ve been working on feminizing the industry a bit is exactly this,

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Horace (cont): that we are seeing a little bit of that. I think that the mini brand – I mentioned before, we have a mini now – the Mini brand is absolutely the brightest idea in  following this model.  Maybe because when you look at… There’s a lot of many fans out there.  And I’m not saying that there’s anything feminine about it.  But it does break through to women.  And that’s… And you can see it in the colors.  You can see it in the in the way it’s essentially… It’s accessorizable.

Jim: Right.  That was their key strategy, was this almost limitless accesorization of the car.  Colors.  All of these things.

Horace: If you look through brochures, like half of it is taken up by changing this or that little thing about it.  But mostly it’s all aesthetics.

Jim: Yes.

Horace: Having little labels.  It has one on

46

Horace (cont): the car seat.  Instead of having some kind of writing on it or something like that it, but it has like a little clothing tag.  The little thing that comes off that says “airbag” on it.  It has that tactile feeling. It feels like an item of clothing.  I won’t get into it.  I’m not trying to sell Minis here.  But the thing that… What appreciated was that they understood that the job is that you want to have a distinctive looking car that you can accessorize.  That it also has…  It shows off your sense of style.  It shows off your sense of taste.  And that is indeed the job that many women hire clothes for.  They hire their clothes in their wardrobe and their shoes to show that they are competent in choosing clothes.  That they can put an outfit together. And that it’s not just looking good and feeling good

47

Horace (cont): But it’s a signaling method that…  Look – I am…

Jim: [crosstalk] put-together. Of course.

Horace: I’m competent in this regard and you should respect me for it.  And that’s…  Men will do the same with all kinds of things, obviously.  It’s not just a female-only job. But I’m saying that along the dimension of putting something together like that…  And if you watch girls when they play, they also like to put things together, right?  And make an ensemble.  That is one of the jobs.  And that’s… As far as I know, only Mini solves it at this point.  So obviously they become extremely attracted to it.  And I don’t know what the numbers are, but I would be willing to bet…  If you drive a Mini, you start to notice a lot of other Minis.  Just like in the Volkswagen you start to notice Volkswagens. But if you drive the Mini… And we do see a lot of Minis. And you look at the driver, I would say it’s 80% female.  I just…  That’s my impression.  I could be wrong.

48

Horace (cont): And they’ll make a model that will be masculine if you want it.  Obviously the color changes.  And all these other things.  And then you can make a powerful version and all that other stuff.  But again, that’s probably a small group relative to the ones who are really focused on just having a wonderful looking car.  So anyway, that’s one aspect of how you can take the car industry as it is, but simply evolve the job to be done in a slightly new direction.  And you’re dealing with 50% of the market in enabling that.  And, by the way, I’m sure Minis are often also second cars in the family.  So there wouldn’t be be a compromise for the man, because he would have also, maybe, his car.  So anyway, that’s just one thought I had about how you can solve the job to be done.  And I think what you’re seeing more and more with cars is positioning on jobs.

49

Horace (cont): Trying – at least the clever ones are figuring out the jobs and not saying our car is a crossover for this or that demographic.  They’ve created over time these car categories.  If you ask any car worldwide, what’s your portfolio?  What car…  What they’ll talk about it…  They’ll all speak the same language. Well, it’s a compact segment car.  As if that was somehow a universal language that everybody understands.  That every consumer thinks, oh, I’m gonna go buy…

Jim: Manufacturing talk.

Horace: Yeah.  I’ll go buy myself a compact segment.

Jim: Compact, gray.  (laughter) Right.

Horace: Or…

Jim: Crossover SUV, right?

Horace: Crossover SUV.  No.  So they all build…  So you see the copycats going on.  So you have…  Somebody builds…  Oh, we don’t have a minivan.  Oh, we gotta have a minivan now because everybody else had… And somebody builds an SUV.  Oh, we’ve got to have an SUV.  So they establish a category.  It’s not that there’s a job.

50

Horace (cont): There might be a proxy for a job, but eventually they all begin to say you have to have that category in your portfolio. Otherwise you’re…  So what used to be… And these categories are out of control.  Look at BMW.  BMW suddenly…

Jim: A car for every niche.

Horace: They’re all over the place.  And they have to have an SUV – not only one, but several.  They have to have a crossover.  They have to have a…

Jim: Station wagon, maybe.

Horace: Porsche has to have one, too.  They have to have a tiny little city car.  They have to have… They bought the Mini for some things.  But they also have the 1 Series.  Then they have to have a two-door.  They have to have a four-door.  On and on it goes.  And then Mercedes did the same.  And so the Germans are like in lockstep following the same formulas.  And what are your French or German I’m sure that… I do not know much about French cars.  But you pretty much see the same thing.  And so they’ve all lost any Frenchness this of them, you know?  Or German.

51

Horace (cont): Because it used to be that German meant something.  And it meant performance.  It meant luxury.  But it meant mostly engineering.  And now you…

Jim: It’s a brand now, mostly.

Horace: It’s a brand. And they’re all…  They have the same bunch of cars, same sizes, the same cookie-cutter as everyone else.  And they’re all built using the same process.  And, what’s more, if you start to look – and I don’t have proof of this – but if you start to look at the factories you see the same tools are in use by every single car factory in the world.  And because the same tools are in use it’s the same process, the same cost structure, the same quality.  So you can’t differentiate if anymore.  You want robots, you got robots.  The same robot company will sell you robots for any car plant in the world.  Same sheet stamping.  Same paint process.  It’s all certified so it doesn’t pollute.  You have to have the latest

52

Horace (cont): design.  All the governments got together and they all agreed that it has to be a water-based paint process…  You have this multiple hundreds of feet long process for painting cars.  And the same supplier supplied…  Probably there are two suppliers in the world that can deliver that type of paint shop.  And so paint shop is put in every factory the world.  And that’s why they all look the same.  They all feel the same.

Jim: So let’s sort of wrap up by just taking the inverse view.  Again, with the growing urbanization, the growing use of public transit by young people…  In the States – maybe you’ve seen this thing – Megabus.  They’re $25.  You go from Chicago to Minneapolis.  You can ride it…  New England – there’s a lot of them.  But they’re big double-decker busses that have wifi.  And they have grown.

Horace: Yeah, they first took off in the

53

Horace (cont): New York/Boston route.

Jim: So they’ve gronw.  If you think about the job to be done.  A) I have my smartphone, my tablet.  I’m going to consume.  I’m going to create things.  Whatever I’m going to do.  And so that is more important to me than sitting behind the wheel and dealing with traffic, in these urban connections, let’s say.

Horace:  Yeah, public transportation could be another thing.  This also has kind of run into a wall.  Public transportation in most of the world is quite good.  We have a lot of options in Europe, for example.  In the US it’s stagnated and atrophied and, in fact, often regressed much to a lot of political debate around that…  Unfortunately, it’s missing the point.  A lot of it is about the economics of ridership, and so on.  But at the end of the end of the day you have to ask the job to be done.  And because of the way the infrastructure is laid out, the job

54

Horace (cont): cannot be done by public transport.  But again, there’s an opportunity for someone to figure something out where you go to a hybrid model, where you figure out a new thing.  Like communication infrastructure.  If you make that available people will commute more because they’ll say, I can be productive during the hour on the train.

Jim: Exactly, exactly.

Horace:  And I, too, have a thing where I could take my son to school driving or I could take my son to school in a bus.  And the bus, though, takes about – I would say – twice as long.  Maybe a bit longer.  So I would lose maybe an hour a day, probably, if I took the bus.  But it’s more comfortable in some ways because I don’t stress over the driving. I don’t stress especially when the weather’s bad.  But I feel like I’m wasting my time there.  So in balance, I still would take the driving option.  But if a

55

Horace (cont): couple of things were tipped against driving, for example congestion charge in the city, right?

Jim: Right.

Horace: That would drive my cost through the roof.  Second, would be if they added Wi-Fi onto the busses sufficiently and provided… I know there’s 3G.  But there are some issues with using a computer on the bus.  But if they architected it in such a way…  If they give you little bit more room, gave you a little bit more…  Maybe a power socket or something like that. Suddenly people will rethink public transportation.  And they’ll think of it as productive time.  And that’s where one wonders, why aren’t they doing this?  So yeah.  Focus on the job.  Do proper research.  Survey people.  Don’t ask them how much does it cost.  Money’s never, usually, the only thing that people care about.  And it may be the only thing you can measure.  Because it’s something easily surveyed.  And you can easily

56

Horace (cont): capture data on that. But the real problem is usually deeper.  And the calculus that takes place in the person’s mind is complicated.  The decision process – do I do it, or do I not do it?  You have to sit down with somebody, work through that in a long interview process with an inquisitive type of mind.  That gets you to the answer.  And then do it a few hundred times to get a good sample.  Then you paint the right picture.  And not much gets done that way.  So, anyway.

Jim:  I think we’ve covered a lot here, Horace.  And probably have… We need to talk about bikes as well.  I have a few things on that.

Horace: Oh, yeah.

Jim: Maybe another time. [crosstalk]

Horace: Bike’s, cars, buses trucks – all these things depend on roads. And what few people talk about is how are roads built.  How are roads funded.  How are roads designed.  And all these things – the design of infrastructure

57

Horace (cont): cannot happen independent of the vehicle.  Or the vehicle cannot be rebuilt and redesigned without understanding the infrastructure.  And this is why the world… You would think of it as already modular.  And we think cars are plug-compatible with roads.  But they are so plug-compatible with roads that no other car fits in.  Right?  And we realize that… hang on.  That means we can’t put bikes on the road because we don’t have places for them.  We haven’t built roads to accommodate bikes.  And when we try we run into all kinds of problems.  And then the bike lane issues and all that stuff.  So, you’re right.  We should talk about this next time. (laughter)

Jim: Yes.

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Episode 1

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